Now, using the NPV and IRR Calculator tab on the excel sheet, enter the following information, and respond to the following questions:
This type of document can be used to evaluate capital projects that are going to be depreciated over a specific period of time, in this case, 7 years.
Your initial investment is always a negative number, because it is money that is going out to purchase the required items for the project. The IRR (internal rate of return) is then compared against the cost of capital.
The cost of capital can be looked at as your benchmark to approve this project. The number represents the amount of money you truly make once you discount the future cash flows.
For our purposes here, if the IRR of your project is less than what you could make with investments, you should reject the project.
Investment: $500,000 (remember, this is cash spent, so it needs to be entered as a negative number) Cash Flows: $100,000 each year for 7 years Cost of Capital: 11%
1. What is the NPV of this project? Would you approve it?
2. What is the IRR? Now, change the Cost of Capital to 8%
3. Explain in no more than 150 words, why the IRR stays the same, but the NPV is now positive?